The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) with the aim of improving financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.

The ASU simplifies accounting for convertible instruments by removing major separation models required under current Generally Accepted Accounting Principles (GAAP).  This will mean more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features.

The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas.

FASB vice chair James Kroeker said: “The ASU is an important step in simplifying a complex area of accounting guidance that has been a frequent source of financial statement restatements. We expect it to improve comparability of information for financial statement users and reduce cost and complexity for preparers and auditors.”